Tag Archives: The Overnight Report

article 3 months old

The Overnight Report: Be Afraid

By Greg Peel

The Dow closed down 107 points or 0.6% while the S&P lost 0.5% to 2084 and the Nasdaq fell 0.4%.

No Prisoners

It’s not often that the Saudi Arabian stock market is seen as an element of influence in global financial markets, let alone downunder. The Saudi influence on oil and OPEC is, of course, critical, but given the Saudi stock market is not open to foreign investors, it is not a market worth worrying about. Until yesterday.

The Saudi Arabian stock market is now to be opened to foreign investors. It’s a no brainer that the most dominant sector in that market is oil. If you are an international investor in the oil sector, Saudi oil companies would represent must-haves as a proportion of your portfolio. But in order to release funds to buy Saudi oil stocks, you’d need to first sell something else.

The ASX energy sector fell 2.6% yesterday. The majors all fell close to 3%, suggesting a blanket “sell Oz oil holdings” trade.

Energy was influential in sending the ASX200 down 53 points from the opening bell, but that took it under 5500 and it seems, for now, 5500 is the line of support. Just like 5600 and 5700 before it. The buyers came in, and the index climbed back steadily all day to a relatively flat close. Bank and industrials were nevertheless the only sectors to actually finish in the green.

As to why utilities was the best performing sector on the market on Friday, and the second worst yesterday (-1.2%), is anyone’s guess.

Take it or leave it

Northern hemisphere markets had their first chance to respond last night to the latest breakdown of talks between Greece and its creditors, on Sunday, at which the European Commission followed in the footsteps of the IMF in throwing up its hands.

There are three critical dates looming for Greece. On Thursday night the eurozone finance ministers are due to meet and the suggestion is an ultimate, take it or leave it deal will be offered to Greece at that time. On June 25, a eurozone leaders meeting is to be held in Brussels. Talk is Alexis Tsipras has his final hopes riding on this meeting, because on June 30, Greece’s bundled IMF repayment is due and its bail-out tranche expires. Thereafter, there will be no money to pay wages and pensions.

There is likely no money to pay the IMF either.

Global financial markets are beginning to realise that this time, it might just be real. A possible Grexit has been on the cards since 2011 and markets have simply become inured to the concept, watching the proverbial can being kicked for so long it seemed nothing particularly untoward would ever happen. This time, however, a Greek default is very much on the cards.

The Greek ten-year bond yield jumped 90 basis points to 12.7% last night and the Greek stock index fell 4.7%. The German stock index fell 1.9%, France 1.8% and London 1.1%. Most of the damage on the Greek market was in the banks, which are currently being supported by an ECB emergency lifeline. If this is pulled, given Greece’s failure to reach an agreement, then the current “walk” on Greek banks will turn into a “run”.

It is likely that before that can occur, the Greek government will be forced to implement “currency controls”, basically freezing the banking system. Rumours suggest, denied by Athens, the government is readying itself for implementation this weekend if it comes to that. Such an event occurred most recently in Cyprus, but Cyprus did manage to stay in the eurozone. In Greece’s case, currency controls may also be the first step in a preparatory, parallel reintroduction of the drachma.

It must be remembered nonetheless, that a Greek default on its IMF repayments does not automatically trigger a Grexit.

Mixed Messages

Selling in Europe flowed over into the US, sending the Dow down 200 points from the opening bell. Trading over the rest of the session then very much resembled Australia’s session yesterday, as buyers came in and steadily push stocks higher. But only half the loss was recovered in Wall Street’s case.

Safety buying was evident in US bonds, with the ten-year yield falling 3 basis points to 2.36%, and to some extent in gold, which rose US$4.90 to US$1186.20/oz. There was no specific collapse in the euro nonetheless, possibly because whatever fallout may occur from a Grexit would be international. The US dollar index is down slightly at 94.82.

Wall Street was also scratching its head over mixed US economic data releases last night.

Economists were expecting the Empire State activity index for June to rise to plus 5.7 from plus 3.1 in May, so a fall to minus 2.0 was a bit of a shock. They were also forecasting a 0.2% rise in industrial production in May, so were bewildered by a 0.2% fall. On the other hand, a rise in the housing market sentiment index to 59 in June from 54 in May represents a nine-month high.

Just when it seems US economic data are sufficiently robust to deem a Fed rate rise pending, a run of weak numbers pops out. While this is frustrating for markets trying to get a handle on the US economic trajectory, it must be even more frustrating for the Fed, which by all indications is now itching to just get the ball rolling.

Commodity Crunch

Sentiment with regard Greece also impacted on commodity markets last night. The LME shifted into sell-mode, with tin falling 0.5%, zinc 1.0%, aluminium, copper and nickel 1.5%, and lead 2.5%.

Iron ore fell US50c to US$64.50/t.

The oils were also sold down, and again Brent crude was sold down more. West Texas fell US43c to US$59.62/bbl and Brent fell US$1.26 to US$62.61/bbl, squeezing the spread further to US$3. When it hits US$2, we’ll be back to what used to be “normal”, many years ago.

With all that is going on in the northern hemisphere at present, the Aussie is looking like it might be a safe place to be. It’s up 0.4% to US$0.7765.

Today

The SPI Overnight closed down 3 points.

The RBA minutes are out today, and the markets will be looking for some further colour on the bank’s easing bias, or not, on “crazy” Sydney house prices and on that recalcitrant currency.
 

All overnight and intraday prices, average prices, currency conversions and charts for stock indices, currencies, commodities, bonds, VIX and more available in the FNArena Cockpit.  Click here. (Subscribers can access prices in the Cockpit.)

(Readers should note that all commentary, observations, names and calculations are provided for informative and educational purposes only. Investors should always consult with their licensed investment advisor first, before making any decisions. All views expressed are the author's and not by association FNArena's - see disclaimer on the website)

All paying members at FNArena are being reminded they can set an email alert specifically for The Overnight Report. Go to Portfolio and Alerts in the Cockpit and tick the box in front of The Overnight Report. You will receive an email alert every time a new Overnight Report has been published on the website.

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article 3 months old

The Monday Report

By Greg Peel

Poised

Activity quietened down on Bridge Street on Friday – a typical Friday session – as the dust settled on Thursday’s big snap-back rally. Materials and the banks gave a bit back in what was otherwise a mixed session across sectors, which saw utilities (+0.9%) find some yield hunters.

The ASX200 has moved up from under 5500 to be sitting at 5550. What happens next will be determined by what happens this week, with the Fed policy meeting taking centre stage on Wednesday night and the Greek spectre hovering.

Greece

With negotiations in Brussels now reaching what this time looks like an unresolvable impasse, given the IMF has stormed out, a Greek default seems inevitable unless either Tsipras sees no alternative but to capitulate to creditor demands or the EU comes up with some other conciliatory plan. The latter seems increasingly less likely.

As to what happens next were Greece to default, nobody knows. While other countries have in the past been forced to organise a work-out of their IMF loan repayments, no one has ever actually defaulted. And no one has ever left the eurozone.

European stock markets went into selling mode on Friday night, with Germany down 1.2% and France down 1.4%. While there has been much talk that global markets are ready for a Grexit, and that the fallout would be minimal, the “nobody knows” factor encourages investors to play it safe rather than sorry.

That feeling spilt over into US markets, sending the stock indices south from the opening bell. The Dow closed down 140 points or 0.8%, the S&P lost 0.7% to 2094 and the Nasdaq fell 0.6%. The day’s major economic data release met forecasts.

The US producer price index rose 0.5% in May at the headline – the biggest jump since 2012. But it was all about the bounce-back in oil prices, and in fact the core PPI, ex food and energy, fell 0.1%. The core rate is tracking at a mere plus 0.6% annualised, which is not in itself impetus for a Fed rate rise. Despite May’s jump, the headline is actually tracking at minus 1.1%, given the big fall in oil prices on a twelve-month basis.

Nonetheless, with the Fed holding a policy meeting this week, releasing a statement and holding a press conference on Wednesday night, it is also safer for Wall Street to retreat to the sidelines, Greece notwithstanding. Despite the German ten-year yield falling back to 0.83% from 0.89% on Friday night on Greece fears, the US ten-year closed unchanged at 2.38%.

The US bond market appears to have now settled itself ahead of what might happen next. No one is expecting the Fed to announce a rate rise in this week’s statement, but there is a chance Janet Yellen might expand on her previous “this year” suggestion and hint that the September meeting – the next to include a press conference – is closing in as the likely candidate. Recent US data have suggested a rebound is indeed occurring in the US economy out of the weather-impacted March quarter.

As to what might happen were the Fed to specifically set a timetable, once again, nobody knows. Opinions range from “already baked in” to “there’ll be chaos, just like 2013’s taper tantrum”. The middle ground argument suggests there will be some initial volatility, but that markets will right themselves fairly quickly.

Or Janet Yellen may not add any more colour on Wednesday night, and simply reiterate that a rate rise is “data dependent”. Then we can all speculate for another three months. Oh joy.

Commodities

Two pieces of news impacted on oil prices on Friday night. The weekly US rig count dropped again, which is a positive for prices, but data indicated OPEC is currently producing at around a million barrels per day more than its own 30 million bpd quota. The implication is that Saudi Arabia is determined to maintain its market share even if it has to accept lower prices.

The impact was a US50c fall in West Texas to US$60.05//bbl, but a steeper US$1.24 fall in Brent to US$63.87/bbl. At under US$4, the Brent-WTI spread has begun to look more historically “normal” now a combination of reduced US supply and expanded US supply infrastructure has reduced the Cushing storage premium. A few years ago that spread blew out to US$27/bbl.

After falling steeply on Thursday night, base metal prices stabilised on Friday night. All metals posted small, mixed moves, except for nickel, which fell 1.2%.

Iron ore fell US40c to US$65.00/t.

Gold was steady at US$1181.30/oz.

A steady US dollar index, at 94.97, supported stability in commodity markets. The Aussie is nevertheless down 0.3% to US$0.7732.

The SPI Overnight closed down 6 points.

The Week Ahead

Negotiations between Greece and its creditors continued through to last night but again ended in stalemate. Tsipras again offered an alternative reform package, but EU officials saw nothing new. Tsipras’ refusal to touch pensions and taxes is the stumbling block. He has offered to continue discussions, but EU and IMF officials have now said they are no longer authorized to negotiate further.

Last night’s meeting was considered by the creditors as the “last attempt”. EU finance ministers will meet on Thursday to decide what to do next.

The Fed policy meeting will otherwise be the focus of global attention this week.

The US economic calendar is a full one this week, beginning with industrial production, housing sentiment and the Empire State activity index tonight. Tomorrow sees housing starts, and Thursday brings the CPI, Philadelphia Fed activity index and leading economic indicators.

Friday brings the quarterly derivatives expiry, or “quadruple witching”.

ECB president Mario Draghi will speak tonight, ahead of eurozone trade, employment and inflation data due this week and the ZEW investor confidence survey tomorrow night.

The Bank of Japan will hold a policy meeting on Friday.

It’s also an expiry week in Australia, with SPI futures and index options maturing on Thursday. On Friday, the quarterly S&P/ASX index changes come into effect.

Tomorrow sees the release of the minutes of the June RBA meeting. Opinions on whether we’ll see another rate cut or not have bounced back and forward since that meeting was held. The RBA Bulletin will be published on Thursday.

Rudi will appear on Sky Business on Wednesday at 5.30pm and on Thursday at noon. He shall host Your Money, Your Call - Equities again on Wednesday, 8-9pm.
 

For further global economic release dates and local company events please refer to the FNArena Calendar.

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article 3 months old

The Overnight Report: IMF Storms Out

By Greg Peel

The Dow closed up 38 points or 0.2% while the S&P gained 0.2% to 2108 and the Nasdaq rose 0.1%.

Bounce

The ducks all lined up in a row for the Australian markets yesterday. After a week-long sell-off which took the ASX200 almost to "official" correction territory, three days of stalling at around 5500, a big rebound on Wall Street overnight, a jump in oil prices and a big jump in the iron ore price, the stage was clearly set.

And so we saw a predictable 1.4% bounce, led by materials (+2.0%) and energy (+2.1%), the banks (+1.8%) and the telco (+1.3%). In other words, all the big boys – the stocks that are always clobbered when the "Sell Australia" button is pressed overseas.

An additional boost was provided by yesterday's May jobs guess & giggle, which suggested a fall in the unemployment rate to 6.0% from 6.1% in April, with April having been revised down from an initial 6.2%. The number beat economist expectations, but rarely does the number match expectations. The fall in unemployment is nevertheless consistent with other related indicators, CBA's economists noted yesterday.

The Aussie dollar spiked on the jobs numbers of course, given the RBA is still forecasting unemployment to rise and thus a falling rate suggests another cash rate cut is less likely. But overnight the US dollar index recovered, hence this morning the Aussie is actually down a tad over 24 hours at US$0.7757.

China

It was probably never going to matter to an Australian market in rebound mode yesterday what the monthly Chinese data dump might bring. As it was, the numbers can be viewed in one of two ways.

Chinese industrial production rose 6.1% year on year in May, up from 5.9% in April and matching forecasts. Retail sales rose 10.1%, up from 10.0% in April and matching forecasts. Given the past couple of months' numbers have surprised to the downside, the fact these numbers met expectations, and suggested slight improvement, can be considered a positive.

The fact that they remain lower than markets, and the Chinese government, would like, is a negative. The May fixed asset investment number also fell to 11.4% growth year to date, down from 12.0% in April, and that's not good news.

Combined with this week's earlier CPI result of 1.2% year on year, down from 1.5% in April, the indication is China's economy continues to struggle. More stimulus ahead? Most likely.

Retail Surprise

As Beijing mulled a lack of domestic consumer enthusiasm, over in the US the story was a different one.

US retail sales rose 1.2% in May to mark the third consecutive rise and to add weight to the rebound from the snowbound March quarter thesis. Economists had forecast 1.5%, but the "miss" was counterbalanced by revisions to the April number, to 0.2% from 0.0%, and the March number, to 1.5% from 1.1%. Perhaps the US consumer is beginning to appreciate lower oil prices after all.

The sales number led Wall Street to kick on from Wednesday night's big gains from the opening bell, but thereafter momentum began to fade. The US dollar index rose 0.5% to 95.02 on the sales number but when one might expect another rise in US bond yields on the same theme, instead the ten-year yield suddenly fell back 10 basis points to 2.38%.

Why? I'll give you one guess.

They shoot horses, don't they?

On Wednesday night, it appeared Greece's creditors were offering at least some form of white flag in offering Athens some breathing space. With the big June 30 IMF repayment obligation looming, the troika offered to hand over a portion of the next tranche of bailout funds if the Greek government would just agree to one of the various reforms insisted upon. That way, Greece could pay the IMF, avoid default, and negotiations could then continue.

But no, Alexis Tspiras will not have bar of it. One of the biggest stumbling blocks is the troika's demand the government raise the retirement age to 63 from 61, and reduce pension payments. Greece's pension payments are the highest in the eurozone, and one can see why Germans are insistent given the German retirement age was recently increased to 67 from 65.

Tsipras has refused point blank, and so in a pique of frustration, last night the IMF walked out on negotiations. Not only did the negotiators leave the building, the IMF recalled the team from Brussels to Washington. The IMF has never walked out of negotiations with anyone before.

The ball is now in Greece's court. Greece cannot afford its payment due on June 30, nor can it afford to pay wages and pensions beyond that point. Greece needs those bailout funds, and even if Tsipras capitulates and the bailout funds are made available, the actual handover has to be approved by all eurozone parliaments. Not only is blanket approval not necessarily a given, there's only a couple of weeks left for parliamentary votes to even be organised.

The clock is ticking. That's why last night European bond yields fell back again, and US bond yields followed suit.

Commodities

The good news is iron ore rose another US30c to US$65.40/t. The bad news is everything else fell last night.

Base metals were particularly hard hit. LME traders are nervous about Greece, and took no solace from China's monthly data, particularly the weak fixed asset investment number. This number plays right into raw material demand. And while rising US retail sales are positive, a rising US dollar is not. Tired of waiting for a decent rebound in base metal prices, last night traders threw in the towel.

Aluminium fell 0.5%, zinc fell 1%, nickel fell 1.5%, copper fell 2.5% and lead and tin fell 3%.

The oils also turned tail last night, with West Texas falling US61c to US$60.55/bbl and Brent falling US49c to US$65.11/bbl.

The International Energy Agency released a report last night in which it increased forecast global demand for oil in 2015, but also noted supply growth will remain strong enough to more than cover any increase.

Gold slipped back US$3.80 to US$1182.00/oz last night on the stronger greenback.

Today

The SPI Overnight closed down 8 points.

After yesterday's big surge, a bit of a pullback would not be unusual today. And it's a Friday, so steaks and red wine beckon. US stocks closed higher and bond yields closed lower, which might otherwise provide impetus for the Australian market, but as the dust settles on yesterday's snap-back rally, there's still a slowing China and default-bound Greece to think about.

All overnight and intraday prices, average prices, currency conversions and charts for stock indices, currencies, commodities, bonds, VIX and more available in the FNArena Cockpit. Click here. (Subscribers can access prices in the Cockpit.)

(Readers should note that all commentary, observations, names and calculations are provided for informative and educational purposes only. Investors should always consult with their licensed investment advisor first, before making any decisions. All views expressed are the author's and not by association FNArena's - see disclaimer on the website)

All paying members at FNArena are being reminded they can set an email alert specifically for The Overnight Report. Go to Portfolio and Alerts in the Cockpit and tick the box in front of The Overnight Report. You will receive an email alert every time a new Overnight Report has been published on the website.

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article 3 months old

The Overnight Report: Rebound

By Greg Peel

The Dow rose 236 points or 1.3% while the S&P gained 1.2% to 2105 and the Nasdaq jumped 1.3%.

Consolidation

Yesterday's session on Bridge Street looked a lot like last Friday's session, in which the index chopped around in a small range and was balanced by specific sector moves. Sitting under 5500, it appears the market was trying to decide whether enough was yet enough after last week's big falls.

Energy led the positive sectors yesterday on a jump in oil prices but elsewhere sector moves were mixed. Healthcare gave back some its gains of the past couple of days and the telco also pulled back, and this time supermarkets were sought. With foreign "Sell Australia" orders now apparently exhausted for the time being, traders have been fossicking around in the rubble for right stocks to buy at lower levels.

The macro has become less important for the moment given the 500 point adjustment. Yesterday's big plunge in consumer confidence – the biggest monthly drop in a year – was not any source of panic and the consumer discretionary sector fell only modestly. The bump up from an initially well received federal budget has been wiped out and confidence is back on the pessimistic side of the equation, at its lowest level for the year.

This despite two rate cuts and a supposedly household friendly budget.

The dust has settled and households have likely come to realise it was not such a great budget, it just wasn't a shocker like last year. Meanwhile, the stock market has fallen out of bed and every man and his dog has cried "bubble" with respect to the Sydney/Melbourne housing market. Little wonder consumers are nervous.

The RBA governor was also in on the bubble act yesterday, pulling out his best Patsy Cline to entertain guests at a luncheon. In a Q&A, Glenn Stevens described the Sydney housing market as "crazy". And on that note, the Aussie dollar spiked up a cent.

The Aussie had previously fallen during Stevens' formal speech, in which he reiterated that the central bank still had room to ease further if needs be. But the conundrum is that "room" and "crazy" are counterpoints. Up to now the official language from the RBA has suggested the central bank is keeping an eye on house prices but is not in panic mode. "Crazy" suggests panic might have begun to creep in.

Stevens also reiterated that he felt monetary policy was having less effect than it otherwise would now that we're down at historical lows. The RBA may still have room to ease but if this is likely to have no more effect than make house prices even more crazy, in the governor's view, then what chance another rate cut?

The Aussie is up 0.9% over 24 hours at US$0.7762, aided by a fall in the US dollar index of 0.6% to 94.58.

Compromise

The German stock market also tumbled last week and actually reached the 10% correction mark, but last night rebounded 2.4%. The impetus was, of course, Greece.

Yawn.

German chancellor Angela Merkel has now indicated she might be prepared to release a portion of bailout funds earmarked for Greece in exchange for at least one of the creditors' reform demands. The troika is insisting on a full package of reforms including asset sales, higher taxes and less generous retirement benefits and the Greek prime minister has to date described the package as absurd.

But if Alexis Tspiras can agree to at least one element, the troika could release some of the funds and allow Greece to make good on its onerous IMF repayment obligation at the end of the month. Presumably, another reform would be rewarded with another hand-out. But Given Greece's repayment commitments only get worse as the year goes on, the full tranche is still ultimately needed by Greece and on that basis Tsipras would eventually have to agree to all the reforms, one presumes.

So will he go for it, or will he see it as a patronising tease? We don't know yet, but having been beaten down, European stock traders saw a least a glimmer of hope and thus reason to go bargain hunting last night.

Rebound

That hope flowed across the pond and sent Wall Street surging from the opening bell. The Greek news spurred a rally in the euro, which was responsible for the drop in the US dollar index. The lower dollar provided a fillip for commodity prices, and thus another rally in oil prices helped add further fuel to the stock rebound fire.

On Tuesday night the Dow was back into negative territory for the year. Last night's rally took it back to close smack bang on 18,000, which seems to be the point of balance between Fed rate rise fears and economic recovery hopes.

On the former point, the German ten-year yield rose again and is now knocking on the door of the full 1.00%. US bond yields also pushed higher, rising 6 basis points to 2.48%.

Commodities

Last week gold broke down out of its longstanding trading range which suggested it could be set for a move back to 1100. But instead it completely stalled and on last night's fall in the US dollar, is back inside that range once more. Rising US$9.40 to US$1185.80/oz, suddenly gold at 1200 is looking more likely than 1100 for the time being.

Lead and zinc couldn't manage to join in the weaker dollar fun on the LME last night which otherwise saw a 0.5% gain for aluminium and 1% gains for copper, nickel and tin.

Iron ore jumped US$1.20 to US$65.10/t.

As noted, the oils were stronger again, with West Texas up US55c to US$61.16/bbl and Brent up US95c to US$65.60/bbl.

Today

Hold onto your hats, the SPI Overnight is up 62 points or 1.1%. The consolidation we've seen these past few sessions has already suggested the local market is itching for a rebound and just needs some specific impetus. Today Wall Street's lead may just be what the doctor ordered.

On that basis it is again unlikely the macro will have much effect, even though we see May jobs numbers today. It might be hard to gauge just what leverage Joe Hockey will seek to gain from whatever the result may be, as it's difficult for one to speak when one's foot is so firmly wedged in one's mouth.

The other spectre in the room today could be China, where May industrial production, retail sales and fixed asset investment numbers are due. However if they are bad, that implies firmer stimulus, so it is unlikely Beijing can conjure up anything to spoil the party on Bridge Street today.

Rudi will make his weekly appearance on Sky Business' Lunch Money today.

All overnight and intraday prices, average prices, currency conversions and charts for stock indices, currencies, commodities, bonds, VIX and more available in the FNArena Cockpit. Click here. (Subscribers can access prices in the Cockpit.)

(Readers should note that all commentary, observations, names and calculations are provided for informative and educational purposes only. Investors should always consult with their licensed investment advisor first, before making any decisions. All views expressed are the author's and not by association FNArena's - see disclaimer on the website)

All paying members at FNArena are being reminded they can set an email alert specifically for The Overnight Report. Go to Portfolio and Alerts in the Cockpit and tick the box in front of The Overnight Report. You will receive an email alert every time a new Overnight Report has been published on the website.

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article 3 months old

The Overnight Report: Indecision

By Greg Peel

The Dow closed down 2 points while the S&P was flat at 2080 and the Nasdaq lost 0.2%.

Confident?

Bridge Sreet opened hesitantly yesterday and appeared unsure as to what direction to take. The previous session had seen a flat close and evidence of bargain hunting in some sectors, but another jump in the US ten-year bond yield in the interim was always going to threaten the mood.

The mood did lift, nonetheless, on the morning's economic data releases.

Total housing finance rose another 3.4% in April, split between a 2.7% increase for owner-occupiers and a 4.5% increase for investors. The good news is first home buyers made up 15.4% of owner occupier loans – a better figure than has been seen for some time – but the bad news is this is misleading. The number of first home loans actually fell 1.3%, meaning the 15.4% increase in the value of loans is all about runaway house prices.

The May rate cut will feature in next month's set of numbers.

Business confidence rebounded in May, according to NAB's monthly survey. NAB's confidence index rose to plus 7 from plus 3 in April and the conditions index rose to plus 7 from plus 4.

Business confidence is an important driver of any economy, and the stock market saw the rebound as reason enough to start picking up some beaten down names. By late morning the ASX200 was up 25 points and it looked as though perhaps a bottom had finally been found following the five-session correction. However, the jump in confidence came as little surprise given the May rate cut and the small business stimulus measures in the federal budget.

And thus seemed not enough to stem the ebbing tide. The ASX200 turned around mid-session and headed south once again, effectively wiping out another 50 points from the day's high to the low on close of down 27. Most sectors finished in the red, and those that didn't, including telcos, closed flat.

The fat lady, it would seem, remains in the wings.

More Bond Selling

Wall Street is similarly finding it difficult to gain any traction at present. We may have to get through this month's Fed policy meeting and out the other side – either with or without any confirmation of when the Fed might raise – before US stock markets can decide upon a direction.

There remains a deal of angst over the fact the Dow Transports average continues to weaken and has now marked a full 10% correction from its highs. One hundred year-old Dow Theory dictates that in order to confirm a bull market, both the Dow Industrials ("the Dow") and the Dow Transports must rise together. Others argue that a hundred years ago is an awfully long time and, just possibly, things have changed a little since then. And indeed, the Transports raced well ahead of the Industrials earlier in the year on lower oil prices, and have corrected on the rebound in oil prices, which is a bit out of the norm for Dow Theory.

Greece is of course another concern and negotiations continue on that front, albeit it's difficult to see how the two parties can reach any middle ground.

The major focus remains the sell-off in US bonds. Last night the US ten-year yield rose another 4 basis points to 2.42%, which was enough to ensure no great impetus to buy stocks at present. It's funny how virtually everyone in the market was calling a rise in US rates a year ago, when yields were much higher, and now that they're much lower but rising, everyone's getting scared.

Again, this month's Fed meeting will be a pivotal event.

Oil Spurt

Having come to terms with OPEC's decision to hold quotas firm, oil traders suddenly decided to jump back into buying mode last night. With the US summer driving season shifting gear, it appears the cart is currently leading the horse as gasoline and other product prices head northward.

Expectations for reductions in crude inventories were also behind last night's surge in oil prices. West Texas rose US$2.35 or 4% to US$60.61/bbl and Brent rose US$1.90 or 3% to US$64.65/bbl.

Base metals saw another flattish session, with price movements once again mixed and none greater than 1%.

Iron ore rose by US10c to US$63.90/t.

Gold was again steady, at US$1176.40/oz.

The US dollar index was also flat last night, hence the Aussie is little moved at US$0.7690.

Today

Westpac's consumer confidence survey will follow hot on the heels of the business survey today. RBA governor Glenn Stevens will also make a speech at lunchtime, and as usual the market will be looking for any policy clues.

Rudi will appear on Sky Business's Market Moves, 5.30-6pm and then later on he will host Your Money, Your Call - Equities from 8-9pm.

All overnight and intraday prices, average prices, currency conversions and charts for stock indices, currencies, commodities, bonds, VIX and more available in the FNArena Cockpit. Click here. (Subscribers can access prices in the Cockpit.)

(Readers should note that all commentary, observations, names and calculations are provided for informative and educational purposes only. Investors should always consult with their licensed investment advisor first, before making any decisions. All views expressed are the author's and not by association FNArena's - see disclaimer on the website)

All paying members at FNArena are being reminded they can set an email alert specifically for The Overnight Report. Go to Portfolio and Alerts in the Cockpit and tick the box in front of The Overnight Report. You will receive an email alert every time a new Overnight Report has been published on the website.

Find out why FNArena subscribers like the service so much: "Your Feedback (Thank You)" - Warning this story contains unashamedly positive feedback on the service provided. www.fnarena.com

article 3 months old

The Monday Report (On Tuesday)

By Greg Peel

Stall

I suggested on Friday morning that despite a big fall on Wall Street on Thursday night, we might just see the ASX200 close higher on the session after a week of carnage. A fall of 5 points meant I was wrong, but not too far off the mark in principle.

The index appeared to completely stall on Friday, as if battle weary participants had called a ceasefire to bury their dead. Evidence of bargain hunting finally emerged, as the ASX200 flipped back and forward across the flatline for most of the session. The close of down a mere 5 points belied some more distinct moves within sectors.

Healthcare was the most highly sought after sector, rising 1.0%. The buyers liked the consumer sectors and industrials as well, but another 0.6% fall for the banks ensured an offset. Resource sectors were flat.

The situation now for Australian financials is an interesting one. Our banks have been creamed on the rise in US bond yields, given the attractiveness of solid dividend yields has been undermined for foreign investors. Yet as US bond yields rise, US bank share prices are rising with them. The US yield curve is now steepening (longer term rates moving up against shorter term rates) as Wall Street prepares for the Fed to begin "normalising" policy.

"Normal" is the key word here, because in a normal monetary policy world, one absent of any QE, rising rates and steepening yield curves provide banks with a greater earnings opportunity as they borrow short term and lend long term, into mortgages for example. For the past three or more years, Australian bank stocks have not performed as "normal" bank stocks. They have performed as utilities, or even, dare I say, fixed income instruments, as if those wonderful yields are a constant. Now they are returning to reality.

Onward and Upward

If we cite rising US bond yields as the most direct driver of last week's 5% drubbing on Bridge Street, then Friday night's surge of 10 basis points to 2.40% for the benchmark US ten-year yield would suggest a continuation of the theme today. Until, at least, the market is satisfied the interest rate differential shift has been sufficiently priced in.

The US bond market is already in nervous sell-off mode, so all it needed was a reasonable non-farm payrolls result on Friday night and they'd be off again.

Economists had forecast 210,000 jobs to have been added in May in the US, but the number came out as 280,000. The unemployment rate ticked up to 5.5% from 5.4% but only because the participation rate ticked up, suggesting more Americans are feeling confident enough to go back into the market to find a job. Wages also rose in May, at a 2.3% annualised growth rate, meaning increased employment is not about workers conceding to take lower wages just to get a job.

It was a trifecta of good news for the US economy – rising employment, rising participation, rising wages. It is evidence that expectations of a rebound out of the weak, weather-impacted March quarter may well be justified. But it also means the Fed will be getting closer to making the big move.

This is a worry for the stock market but not as much of a worry as it might have been earlier in the year. Earlier in the year, we might have seen the Dow down a couple of hundred points on this strong jobs number, but in the interim Wall Street has come to accept that the Fed will eventually raise, so there's no point in losing sleep over it. Exactly the same scenario played out in 2013 when it was all about the tapering of QE, and then in 2014 Wall Street started hitting new all-time highs.

On Friday night the Dow closed down 56 points or 0.3%, the S&P dipped 0.1% to 2092, and the Nasdaq actually rose 0.1%.

Commodities

The strong jobs number also sent the US dollar index up another 0.9% to 96.35. While not good for commodity prices in isolation, a stronger US economy is indeed good for commodities. Next week sees a raft of Chinese data for May, and the Greek spectre is still floating around, so traders were reluctant on Friday night to get too carried away.

Base metal prices closed mixed on smallish moves, with a 1% fall in lead cancelling out a 1% gain in nickel.

Iron ore rose US30c to US$63.80/t.

Having broken out of its trading range the night before, gold might have been set for a big drop on the solid jobs number but then gold always seem to take a day or two to think about such matters. It fell US$3.80 to US$1172.30/oz.

OPEC held its six-monthly meeting on Friday night and surprised no one by making no cuts to current production quotas. It was when OPEC surprisingly announced no cuts in its previous meeting back in December that oil prices collapsed.

Oil prices initially fell on the OPEC announcement but quickly recovered, likely because they were sold down earlier in the week in anticipation. Gasoline prices also jumped in the US on Friday night to provide added impetus for crude. This year's US summer driving season may yet be a good one. West Texas rose US99c to US$58.97/bbl and Brent rose US$1.15 to US$63.25/bbl.

The US dollar rally sent the Aussie down 0.8% to US$0.76.26 by Saturday morning.

China

Beijing released China's May trade numbers yesterday and again they were indicative of a slowing domestic economy.

Exports fell 2.5% year on year in the month but this figure was better than expected, following falls of 6.4% in April and 15% in March. However imports fell a hefty 17.6% year on year in May when a 10% fall was forecast. It's the seventh consecutive month of falling imports.

The numbers suggest Beijing is struggling to transition from an export economy to a domestic consumption economy and that stimulus measures to date are yet to prove effective. Commentators suggest time is still required for stimulus measures to have their impact. The government's decision to cut import tariffs on some consumer goods should drive a modest import pick-up soon, but clearly further fiscal and monetary policy measures are needed if Beijing is going to hit its target of 7% growth in 2015.

Greece

German chancellor Angela Merkel would like Greece to remain in the eurozone but warned last night that "time is running out". Greece's creditors have offered the country a new lifeline, albeit one previously discussed, which would see Greece given a nine-month extension on the IMF repayments due this month, that Greece likely cannot pay this month, and also given E10.9bn in additional bailout funds which the creditors had set aside as an emergency fund for Greece's banks.

The catch, of course, is that Greece must agree to a set of reforms, which include increasing sales taxes, cutting pensions and making it easier to hire and fire workers. Greek prime minister Alexis Tspiras has labelled these reforms variously "absurd" and "irrational" and was happy to tell the G7 leaders as much in a speech at their meeting in Bavaria.

In response, Tspiras received a visceral bollocking in a speech from European Commission head Jean-Claude Juncker, and the ire of every other leader in the room, including President Obama. Leaders are united in urging Greece to concede to reforms.

Tsipras has since said he is prepared to "make concessions". If his stance up to now is anything to go by, his idea of "concessions" is the creditors capitulating and letting Greece have the money without reforms.

And so it goes on.

Having become more confident last week that a deal was close to being reached, European stock markets turned tail again last night as it appears ever more likely a Grexit is the only outcome. Last night the German DAX fell 1.2% and the French CAC 1.3%. The DAX is now in correction territory.

Down for the Year

The dour mood carried cross the pond and saw the Dow falling steadily to be down 89 points around lunchtime. From there a rally was attempted and all bar around 20 points of the fall was recovered, but late selling sent the average back down again.

The Dow closed down 82 points or 0.5% and has wiped out all previous gains for 2015. The S&P fell 0.7% to 2079 and the Nasdaq dropped 0.9%.

Aside from Greek fears and week Chinese data, Wall Street was last night still coming to terms with Friday night's positive jobs number, and its implications for Fed rate rise timing. Having jumped sharply on Friday night, last night the US ten-year bond yield slipped back 2 basis points to 2.38%.

But the US dollar index, which jumped on Friday night on the jobs result, fell back 1.2% to 95.23 last night. The fall has been linked to an offhand remark made by President Obama to his G7 chums that he thought the dollar was too high.

And hence the Aussie is up 0.9% from Saturday morning at US$0.7696. It's thus basically a tad higher than where it was when local markets closed on Friday.

Commodities

The weak Chinese trade data did not have as much impact on the LME as one might expect, given base metal prices again showed minimal movement. The exception is nickel, which jumped 2%.

Iron ore was steady at US$63.80/t.

Gold was steady at US$1173.70/oz.

The oils were weaker on the weak Chinese data. West Texas fell US71c to US$58.26/bbl and Brent fell US50c to US$62.75/bbl.

The SPI Overnight closed down 24 points or 0.4% last night for a 28 point fall since the market was last open.

The Week Ahead

Greece will no doubt continue to be a source of nervousness and of back and forth news as the week progresses.

China's economy will continue to be in the spotlight this week as inflation numbers are released today and industrial production, retail sales and fixed asset investment numbers on Thursday.

With the strong jobs number still resounding on Wall Street, this week's important data releases begin on Thursday with retail sales and inventories followed by the PPI and consumer sentiment on Friday. More grist for the Fed rate rise mill.

It's a busy shortened week this week locally. Today kicks off with the housing finance, the ANZ job ads numbers and NAB's monthly business confidence survey, the first post-budget. The same is true for Westpac's consumer confidence survey out tomorrow. On Thursday it's the May jobs numbers.

Rudi will appear on Sky Business on Wednesday at 5.30pm and on Thursday at noon. On Wednesday he'll be back as host on Your Money, Your Call, 8-9pm.

For further global economic release dates and local company events please refer to the FNArena Calendar.

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article 3 months old

The Overnight Report: Wall Street Joins In

By Greg Peel

The Dow closed down 170 points or 0.9% while the S&P lost 0.9% to 2095 and the Nasdaq fell 0.8%.

Freefall

What began with a technical trigger for the ASX200 has since deteriorated into freefall as investors across the globe exit government bond positions. The benchmark for this sell-off is Germany, as representative of the stronger members of the eurozone.

Mario Draghi indicated after the ECB policy meeting on Wednesday night that he had no intention of upping the ante on what is already an extensive QE program, and at the meeting the ECB lifted its 2015 eurozone inflation forecast to 0.3% from 0.0%. This implies that if anything, in due course the QE program will be reduced as the eurozone economy improves.

So call the sell-off in German bonds a form of pre-emptive “taper tantrum”, brought about by a very overcrowded market. Throw in the fact US investors are now largely resigned to a Fed rate rise this year, with specific timing no longer important, and it just comes down to who’s going to blink first in the US bond market. It is a given that US bond rates will rise when the Fed hikes its cash rate but markets move ahead of such developments, so when to bail?

Well, Germany seems to have forced the hand.

If a 20 basis move up in the German ten-year rate on Wednesday night was the butterfly, the typhoon yesterday was a 2.4% drubbing for the Australian utilities sector on the ASX. All other sectors (bar tiny info tech) were down around the 1.5% mark, which is implicit of “Sell Australia” or simple index selling and here the technicals also contribute. But all other sectors represent at least some opportunity for growth. Utilities, on the other hand, are the chug-along cash generators – not offering a lot in capital appreciation but providing a nice steady yield.

It was yield that took us up and it is yield that is bringing us down. Foreign investors are not waiting around to see if the US ten-year can hit 3% or if the Fed announces a rate rise, whichever might come first. They are selling their peripheral yield plays, established solely on the basis of rate differentials between Australia and the rest of the world, and the premiums quality Australian stocks offer above government paper.

At just above 5500, the ASX200 is down 4.7% from last Friday’s interim high and 8.6% from April’s post GFC high of not quite 6000. This is exactly the sort of move Wall Street has been looking for, almost pleading for, for itself the past couple of years of new all-time highs. It may not be very comforting downunder, but in historical market terms it is typical, very healthy for a bull market, and provides investors with a fresh opportunity.

Particularly if that opportunity has been missed up to now.

Closer to Home

If we leave global bond rates aside for a moment, yesterday’s domestic data were enough to inspire selling anyway. That is unless we take weak Australian data as increasing expectations of another RBA rate cut, which would offset some of that global interest rate differential squeeze.

Economists were forecasting 0.3% growth in Australian retail sales in April. The forecast takes into account April was before the last RBA rate cut and ahead of the federal budget release. So at 0.0%, it was a bit of a shocker. Economists can only assume that Australian consumers were so petrified about what Mr Hockey might deliver, given his previous effort, that they spent April hiding in the cupboard with all their cash clasped in their shaky hands.

It is very likely we’ll see a better sales result for May. But yesterday also featured another shocker, in the form of the April trade balance.

Forget Wednesday’s positive March quarter GDP result. That’s ancient history. It told of stronger than expected export volumes but given spot commodity price falls take a while to flow through to forward trade contracts, what it did not fully reflect were lower commodity prices.

Australia’s trade deficit widened in April thanks to a 5.7% in (the value of) exports and a 3.9% rise in imports. Iron ore exports fell 13% and coal exports fell 22%. Part of the plunge in coal export value can be attributed to the wild east coast weather in the month, closing ports, but the other part is prices, as is the case for iron ore.

The good news is that the lag in movement of contract prices from the movement of spot prices probably means April represents the nadir for iron ore pricing, and from here on the iron ore price rebound should flow through. Coal prices have seen little recovery.

The Australian economy needs the non-mining sectors to take the baton as the resource sector suffers the double-whammy of declining investment and lower commodity prices. Consumers are an important element. If April’s numbers are anything to go by, the prognosis for the Australian economy is bleak. Cue Stephen Sondheim:

Where are the clowns? There ought to be clowns.

Greece

And speaking of records, the broken one was still scratching away last night.

“Shocking, provocative, disgraceful and dishonourable”. No, this is not a description of Sepp Blatter. This was the response from members of Greece’s governing Syriza party when prime minster Alexis Tspiras showed them the reform ultimatum Greece’s creditors had handed him – deemed requisite for Greece to receive its next bail-out tranche.

“Such extremist proposals cannot be accepted by the Greek government,” Tsipras is quoted as telling his associates. “Everyone must understand that the Greek people have greatly suffered over the last five years and some have to stop playing games at their expense”.

Earlier this week, Tsipras assured IMF chief Christine Lagarde that Greece had the money and would make good on its E300m payment due tonight. Last night Athens informed the IMF this would not be the case. Instead, all four June payments will be bundled and the total of E1.6bn will be paid at the end of the month.

While such bundling has been suggested before now, this sudden shift has been taken as representing an angry backlash from Tsipras regarding the so-called austerity ultimatum. Commentators are suggesting a default has just become a little more likely.

And so it goes on.

Wobbly Wall Street

European stock markets traded lower on the latest development in the Greek drama and sentiment carried across the pond. News also came through that the IMF had cut its 2015 US growth forecast to 2.5% from 3.1% and that Christine Lagarde had told her chum Janet Yellen that the Fed should not raise this year.

But Yellen has already said it will, and last night’s US economic data provided another reason to believe it must.

Last night US March quarter productivity growth was revised to a negative 3.1%. Low productivity leads to higher wages. Higher wages lead to inflation. Inflation leads to a rate rise.

So there was cause enough for US stock indices to fall last night, but realistically the backdrop of bond market volatility is finally giving Wall Street the jitters. Last night the German ten-year yield came back a whole 5 basis points to 0.84%, allowing the US equivalent to fall back 6 basis points to 2.31%. But the seed is now sown, and with US jobs numbers out tonight, it makes sense for bond traders to square up beforehand.

The Dow has now fallen back through 18,000 and the S&P through 2100. Not that this hasn’t happened more than once already this year, but given what’s been going on in the Australian market, one feels something has to give on Wall Street fairly soon.

Commodities

No one was prepared to take any bets on US jobs on the LME last night either. Throw in Greece and the IMF cut to its US growth forecast and all base metal prices closed lower. Cooper led the charge with a 1.4% fall.

Ditto in oil markets, although for oil markets there is the added expectation of tonight’s OPEC meeting not bringing any cuts to production quotas, thus inspiring pre-emptive selling. West Texas fell US$1.63 to US$57.98/bbl and Brent fell US$1.66 to US$62.10/bbl.

Iron ore doesn’t pay much attention to such things. It’s up another US90c to US$63.50/t.

Gold fell US$8.50 to US$1176.10/oz. A 0.7% fall is not particularly remarkable, but last night gold broke out of its long-standing trading range. Goodbye 1200, hello 1100.

Commodity price moves leant little to the US dollar last night, as it ticked up only slightly on its index to 95.51. This means the 1.2% fall in the Aussie over the past 24 hours to US$0.7688 is all about yesterday’s data shocks, and subsequent expectations of another RBA rate cut ahead.

Today

The SPI Overnight closed down 17 points or 0.3%.

With the Dow down 170 and the futures down 17, one would normally assume a weak session today. I’m going to stick my neck out, however, and suggest we close higher today. Wall Street is following, not leading, global bond rates fell back a bit last night, and yesterday in this Report I said: “Maybe the day to buy is when the SPI Overnight closes down.”

But then again I wouldn’t be at all surprised if at 4.00pm we’re down another percent.

Australia’s construction PMI is out today, and S&P/ASX will announce its quarterly index changes, which may affect some non-macro argy-bargy amongst affected stocks.

US jobs tonight.

Long weekend for most of Australia. The ASX will be closed on Monday.
 

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article 3 months old

The Overnight Report: Here Comes Europe

By Greg Peel

The Dow closed up 64 points or 0.4% while the S&P rose 0.2% to 2114 and the Nasdaq added 0.5%.

Misleading

Yesterday on the local market we saw another plunge from the open as the sell-off continued. At 11.30am a positive surprise on GDP popped its head up but was quietly steamrolled over by a market driven by technical momentum and a fundamental ongoing rise in bond rates in Germany which is translating to bond rate rises in the US and across the globe.

Higher global bond rates make Australia’s yield stocks less attractive, so it’s not just domestic sellers in there trashing our market at present.

Joe Hockey took credit for yesterday’s positive GDP result which is surprising, given that over which he has any control registered 0.0% growth. But Joe’s just the most recent in a long line of treasurers who think they can spin any numbers to political advantage. The 0.9% quarter on quarter growth result was an improvement on December’s 0.5% but not enough to prevent the annual growth rate falling to 2.3% from 2.5%.

If we split the result into exports and domestic demand we see 0.5 percentage point growth for the former, as we were tipped off about in Wednesday’s current account numbers, and a flat result for the latter. Household consumption rose 0.3ppt and inventories rose 0.3ppt but business investment fell 0.5ppt and public spending was flat. Inventory growth is a worry, as it may imply growing confidence in the ability to sell more product or it may imply misplaced confidence, over-buying and a lot of discounting required ahead to move surplus stock.

In terms of the export result, we do tend to forget that the “mining boom” is not over, it’s just matured. The domestic economy is no longer benefiting from mining capacity investment but increased supply is now providing for greater volumes of exports, sufficient to offset commodity price weakness. But with business investment still heading south, and a lot more of the decline in “mining” investment to come (mostly LNG), it’s hard to see just what is going to spark up the non-mining side of the economy.

The government’s small business package? I think the emphasis is on the word “small”.

Whereto?

On a technical basis the next level of support for the ASX200 is 5575. Two weeks ago we traded at 5574 intraday before the bargain hunters moved in and eventually we rallied to back above 5750. Failure to hold that has seen us drop back under 5600, closing at 5583 yesterday with no cavalry in sight.

Last night the US ten-year bond yield jumped another 10 basis point to 2.37%. This was largely a result of the ECB increasing its 2015 eurozone inflation forecast to 0.3% from 0.0% at last night’s policy meeting. The German ten-year yield jumped 20 basis points to 0.89%.

Today’s action will be a test of whether the local bargain hunters still see the same level from two weeks’ ago as a bargain. The fundamentals of rising global bond yields are very much pressuring the market the other way. On Monday morning the SPI futures closed up 18 points and ASX200 subsequently fell 99 points. Yesterday morning they were up 17 and we fell 52. This morning they’re up 6 points.

Maybe the day to buy is when the SPI Overnight closes down.

Beige

Last night’s ADP private sector jobs report in the US showed 201,000 jobs added in May, up from 165,000 in April and the best result in four months. The result fell short of forecasts of 215,000, but the number that matters is tomorrow night’s non-farm payrolls, and Wall Street will reserve judgement until that is released.

The 201,000 result was “okay”, just as April’s non-farm payrolls result was “okay”. Last night the Fed released its regular anecdotal assessment of the US economy, its Beige Book, and declared the pace of growth to be “modest to moderate”, and suggested there are signs of a rebound out of the weak first quarter.

There is nothing here to imply either a sooner Fed rate rise or a later Fed rate rise. Thus the US stocks indices meandered through the session to a modest gain.

The US dollar index fell again, by 0.6% to 95.34, on another move up in euro thanks to the ECB’s inflation forecast. The RBA will be relieved that 78 at least seems to be the ceiling on the Aussie for now, as despite yesterday’s positive GDP result and another drop in the US dollar index, the Aussie is steady at US$0.7779.

Commodities

That the ECB should see a brightening outlook for the eurozone economy is not good news for gold bugs, so despite another fall in the greenback, gold fell US$8.40 last night to US$1184.60/oz.

LME traders are happy to sit it out until the US jobs numbers hit the wire, hence base metal prices were again mixed on small moves.

Iron ore rose US50c to US$62.60/t to mark a three-month high.

Oil traders will also be keeping an eye on Friday night’s jobs numbers but for them another focus of attention will be Friday night’s OPEC meeting. Although no one expects Saudi Arabia to waver from its stoic stance against US shale oil overproduction, there is a slight chance smaller producers may force at least some capitulation on OPEC quotas. Thus the feeling is a reinforcement of current quota levels will send oil prices south on disappointment.

Squaring up is thus sensible, and last night West Texas fell US$1.45 to US$59.61/bbl and Brent fell US$1.62 to US$63.76/bbl.

Today

As noted, the SPI Overnight closed up 6 points.

With the March quarter now filed away, locally the market will look to today’s April retail sales and trade balance numbers for direction. That sales result is nevertheless pre-May rate cut and pre-budget, so economists are primed for a soggy outcome.

Challenger ((CGF)) will hold an investor day and ANZ Bank ((ANZ)) do the same for its New Zealand business.

Rudi will appear on Sky Business twice today. At midday (noon-12.45pm) for Lunch Money and again between 7-8pm on Switzer TV.
 

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(Readers should note that all commentary, observations, names and calculations are provided for informative and educational purposes only. Investors should always consult with their licensed investment advisor first, before making any decisions. All views expressed are the author's and not by association FNArena's - see disclaimer on the website)

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article 3 months old

The Overnight Report: Greece, Again

By Greg Peel

The Dow closed down 28 points or 0.2% while the S&P lost 0.1% to 2109 and the Nasdaq lost 0.1%.

Technicality

Last night the popular press explained yesterday’s crash on Bridge Street as being the result of the RBA not cutting rates. It’s a simple concept even the great unwashed might be able to grasp, but it’s also a complete load of rubbish.

At 2.29pm yesterday the ASX200 was down 80 points. That the index fell another 19 points to the close in what was a rolling 1.7% sell-off is a triviality. Indeed, there was a slight bounce at 2.30pm, but a short-lived one.

There was also a brief bounce at 11.00am, at a time the index was already down 63 points. This was sparked by the release of Australia’s March quarter current account numbers, including the terms of trade. These numbers came as a shock. A positive shock.

Australia’s trade surplus rose by 24% in the quarter, driven by a 5.8% increase in exports, thanks to a 6.9% fall in the Aussie dollar over the period, outpacing a 4.0% increase in imports. This trade balance will add 0.5 percentage points to the March quarter GDP, due out today. Prior to yesterday, economists forecast zero contribution from trade. Economists are typically conservative, measured types. You’ve never seen a bunch of guys and gals scramble so fast to revise their estimates as they did after yesterday’s current account release.

Previous consensus was for 0.5% quarter on quarter growth. Revisions now stretch up as far as 0.9%.

One might argue that these positive trade numbers will kill off any hopes of another RBA rate cut, and that’s why the 11am bounce for the ASX200 proved short-lived and the selling resumed in earnest once more. However the bottom line is that yesterday’s 99 point drubbing was technical. Whether or not you believe in the tea leaves, enough people do to make those tea leaves self-fulfilling. Tech analysts have been boring everyone for about a month with an unchanged mantra that if the ASX200 cannot hold over 5750, it must go down.

And so yesterday, it did.

Sector moves? Well, they matter not. Everything was creamed. It was technical.

Aussie Aussie Aussie

Last night the popular press explained yesterday’s surge in the Aussie dollar as being the result of the RBA not cutting rates. It’s a simple concept even the great unwashed might be able to grasp, but it’s also a complete load of rubbish.

Well…actually in this case there is an element of truth. The stock market was never going to specifically react to no rate cut because no one expected a rate cut. Forex cowboys nevertheless hail from another planet, so at 2.30pm yesterday the Aussie did spike up. But the Aussie had already spiked up at 11.00am on the release of those surprisingly positive trade numbers, which is what one might expect. Clearly the market was set short ahead of yesterday, so by the afternoon the short-covering scramble found another gear when the RBA stayed put.

It was not the fact that the RBA didn’t cut that caused the spike nonetheless, it was this line from Glenn Stevens accompanying policy statement:

“Information on economic and financial conditions to be received over the period ahead will inform the Board's assessment of the outlook and hence whether the current stance of policy will most effectively foster sustainable growth and inflation consistent with the target.”

And what information had we already received? A positive shock in the trade numbers.

Over 24 hours the Aussie is up a significant 2.2% to US$0.7777. It is not because the RBA didn’t cut yesterday. It is because today’s GDP release may come in better than previously expected, and that may yet kill off the possibility of rate cut anytime soon, and it’s because of Greece.

Capitulation?

The 2.2% gain in the Aussie to this morning has a lot to do with a 1.6% plunge overnight in the US dollar, to 95.93 on its index, which is all about a surge in the euro. I’ve noted recently the popular press have been trotting out Greece these past weeks an easy excuse for market movements when they really have nothing else to go by, but this time the Greece factor was indeed in play last night.

Last night Greece’s creditors – the IMF, European Commission and ECB – met to argue amongst themselves rather than argue further with the Greek government. That strategy has gotten them nowhere. The troika has persistently demanded Greece come up with an agenda of reforms, and Greece has persistently failed to do so, or at least has offered agendas the troika has abruptly dismissed.

So at wits’ end, last night the creditors decided to take matters into to their own hands and come up with an agreed agenda of reforms to give to Greece on a take it or leave it basis. If you want your money, they said, you’ll have to play it our way.

When Alex Tsipras heard this was what the meeting was all about, the Greek prime minister quickly drew up another version of his own reform agenda and thrust it at the creditors. Pure politics, of course; Tspiras must be seen by the people who elected him to be standing up to the troika and forcing its hand, not bowing meekly to its demands.

And so it goes on.

Last night’s meeting did suggest to the world the troika is prepared to do what it has to to try and keep Greece within the fold, at least within reasonable bounds. Throw in a stronger than expected flash estimate of eurozone May CPI, and the euro took off.

Wall Street Stalled

The Dow is struggling to break away, in either direction, from the 18,000 level at present. The S&P500 is similarly glued to 2100. Last night saw a mixed batch of news, and little in the way of direction.

US stock markets opened with the news factory orders had fallen short of expectations for the eighth month in nine. The indices opened to the low side, but by this stage the euro was rallying and the US dollar falling. This is good for exporters but also for the oil price, and so a turnaround rally ensued. Throw in announced record auto sales for the month of May, and the Dow did manage a 50 point gain at its peak.

But it’s jobs week, and no one wants to get too carried away. The Dow fell back to close down 28 points, balancing out the 29 points it closed up on Monday night.

Not so stagnant is the US bond market, which last night saw the ten-year yield jump 7 basis points to 2.27%. The sell-off in US bonds was triggered by a sell-off in German bonds, which was triggered by the news regarding Greece.

Commodities

As noted, the drop in the US dollar last night was enough to push up West Texas crude by US85c to US$61.06/bbl and Brent by US44c to US$65.38/bbl.

Action was more muted on the LME nonetheless, where traders are also cautious ahead of this week’ US jobs numbers. No base metal price moved more than 1%, and all moved in different directions.

Back from a break, iron ore is up US70c to US$62.10/t.

A 1.6% plunge in the greenback couldn’t excite gold traders, hence gold is up a mere US$4.40 to US$1193.00/oz.

Today

The SPI Overnight closed up 18 points or 0.3%. Bear in mind this time yesterday the SPI was up 17 points.

Australia’s GDP result is out today, and given all the downs and ups of lead-in component releases – construction, capex, trade – it’s become a bit of a guess and giggle.

Australia will also see a services sector PMI today, and HSBC will release its take on the Chinese services PMI. The rest of the world will follow tonight.

Tonight sees the ADP private sector jobs number is the US, and the latest Fed Beige Book.

Rudi will appear on Sky Business tonight, Market Moves, 5.30-6pm.
 

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article 3 months old

The Overnight Report: Data Deluge

By Greg Peel

The Dow closed up 29 points or 0.2% while the S&P gained 0.2% to 2111 and the Nasdaq rose 0.3%.

Insanity

So tell me: what changed between Friday and Monday as far as Bridge Street is concerned? Greece? Give me a break. That long running saga is just something the media trots out each time it cannot otherwise rationalise market movements. Building approvals? Well that was a slight disappointment but nothing to sell the farm over and besides, all last week we saw worrying Australian data but that didn’t stop the ASX200 being up over 90 points at one stage on Friday.

And then yesterday it was down over 90 points before midday, and most of that fall was in place before the building approvals release. For the record, building approvals fell 4.4% in April, worse than the 2.0% expected. Housing is about the only thing driving the Australian economy at present, and not by enough to overcome contraction elsewhere. But most of that 4.4% represented lump apartment block approvals, and net approvals were up a very healthy 16.3% year on year in April.

The bottom line is, there was very little to justify the rally on Friday, and nothing to justify why the mood might change so spectacularly over the weekend. If you’re a longer term investor you might as well just sit back and laugh while the idiots play their games. Intraday volatility on Bridge Street is off the scale, but the ASX200 has done nothing but range-trade since the beginning of March.

Yesterday’s rebound from the bottom, such that we only closed 40 points down, occurred after the index breached 5700. I suggested the other day it looked like 5700 was the new 5600 in terms of bargain hunter support. But if you believe in the technicals, yesterday’s failure to hold over 5750 means we’re headed south.

And seriously, what would presently justify a major move north?

PMIs

In case you missed it in yesterday’s dust, Australia’s manufacturing PMI rose to 52.3 last month from 48.0 in April. That means expansion. Woohoo!

The lower Aussie has been touted as the fillip, but I’m pretty sure this PMI has not posted two consecutive months over 50 in many years, it’s ridiculously volatile, and let’s face it, manufacturing is rapidly becoming an insignificant contributor to GDP.

Beijing’s manufacturing PMI for China has posted three consecutive months of expansion. This might sound like great news, except that at 50.2, the May number reveals three months of negligible expansion. Besides, at 49.2, HSBC’s own China manufacturing PMI has now posted three consecutive months of contraction.

Japan has managed to sneak back into expansion at 50.9, the UK ticked up very slightly to 52.0, the eurozone saw a more pleasing increase to 52.2 from 50.0, and the US was also pleased with a move up to 52.8 from 51.5.

It would seem the global manufacturing sector is just managing to grow overall. On official numbers we have 52.3, 50.2, 50.9, 52.0, 52.2 and 52.8. Given the vicious currency wars in play around the globe, it’s an interesting suite of numbers.

Wall Street

Wall Street was pleased with a stronger manufacturing sector in May and also pleased with a solid jump in construction spending in April, both of which support the thesis that negative economic growth in the March quarter was all about the weather. But when it came to last night’s personal income & spending data for April, the mood turned a little sour.

Incomes rose 0.4% in April, which is promising against the prevailing weak trend of 0.2%. But consumer spending post 0.0% change. Savings levels increased to 5.6% from 5.2% of income and have now been over 5% for five consecutive months.

Also of interest is the alternative measure of inflation that arises from the personal income & spending numbers. The core personal consumption & expenditure (PCE) measure posted 1.2% annualised growth in April. This compares to inflation as measured by consumer prices, ie the CPI, which showed 1.8% annual core growth in April.

The Fed prefers the PCE to the CPI. Thus if rising inflation is to be a trigger for the first rate rise, it’s a long way off. But on Friday we get jobs numbers, and that’s another trigger.

Wall Street initially rallied on the data last night before thinking better of it, with the Dow turning a peak 95 point gain into only a 29 point gain on the close.

But the US bond market saw it the other way. Spending and inflation aside, the currently volatile bond market decided the positive manufacturing and construction numbers justified expectations of a rebound out of the contractionary March quarter. Hence the ten-year yield rose 10 basis points to 2.19%.

The US dollar index also rose, up 0.6% on its index to 97.45.

China Syndrome

Commodities markets were more focused last night on Chinese data than on US data. On the LME, traders would probably have preferred to see Beijing’s official manufacturing PMI slip into the negative to match HSBC’s interpretation, which would bolster the chances of further stimulus. At 50.2, it’s sort of neither here nor there.

Thus metals prices were mixed on uncertainty, with aluminium up 1% and nickel up 3%, lead and zinc down 1% and copper down slightly.

The iron ore market was closed last night for a holiday, leaving the spot price unchanged at US$61.40/t.

Oil traders could not find any inspiration out of a very busy 24 hours of global data. West Texas was little changed at US$60.21/bbl and Brent fell US51c to US$64.94/bbl.

Gold is down a tad to US$1188.60/oz.

With the RBA meeting today, the Aussie is 0.5% lower over 24 hours at US$0.7608 but no one expects a rate cut today.

Today

The SPI Overnight closed up 15 points or 0.3%.

While there’s very little chance the RBA will cut, the market will still be clearly focused on the statement release this afternoon. Last month’s statement caught the market by surprise by being rather upbeat. All the data in the meantime – particularly last week’s quarterly construction and capex numbers – have been downbeat. What will the board have to say today?

Before that decision, we’ll see the March quarter current account numbers, including the terms of trade. At the end of the day, this is Australia’s driving force.

The eurozone will see a flash reading of May CPI tonight, while factory orders will be the focus on Wall Street.
 

All overnight and intraday prices, average prices, currency conversions and charts for stock indices, currencies, commodities, bonds, VIX and more available in the FNArena Cockpit.  Click here. (Subscribers can access prices in the Cockpit.)

(Readers should note that all commentary, observations, names and calculations are provided for informative and educational purposes only. Investors should always consult with their licensed investment advisor first, before making any decisions. All views expressed are the author's and not by association FNArena's - see disclaimer on the website)

All paying members at FNArena are being reminded they can set an email alert specifically for The Overnight Report. Go to Portfolio and Alerts in the Cockpit and tick the box in front of The Overnight Report. You will receive an email alert every time a new Overnight Report has been published on the website.

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